India central bank cuts key interest rate to 6.75%

GabrieleParussini

MUMBAI--India's central bank Tuesday cut its key interest rate more than markets expected and for the fourth time this year amid optimism Indian inflation rates will remain low.

Reserve Bank of India Governor Raghuram Rajan cut the repurchase-agreement rate by 0.5 percentage point to 6.75%. That brings the total easing by India's central bank to 1.25 percentage points since the beginning of the year.

An easing move was widely expected by markets, with 11 out of 13 economists polled by The Wall Street Journal last week predicting the RBI would cut rates. However, analysts had forecast a more modest cut of 0.25 percentage point. Eight of the economists predicted Mr. Rajan would cut rates by another 0.25 percentage point during this fiscal year, which ends in March.

Mr. Rajan noted in the policy statement that inflation hit a nine-month low in August, and that despite the monsoon shortfall and the uneven distribution of seasonal rains, food inflation pressures have been contained by the government's supply-management policies.

"Since our last review, the bulk of our conditions for further accommodation have been met," Mr. Rajan wrote in his policy statement. He also noted that underlying economic activity remains weak.

The RBI's move is likely to provide a boost for India's economy, which decelerated in the quarter ended in June.

While India's recently-recalculated gross domestic product figures suggest it is one of the fastest-growing economies in the world, economists warn that other indicators suggest it may be struggling.

The central bank said Tuesday it is marking down its growth forecast for this fiscal year, which ends in March, to 7.4% from 7.6%.

With a key state election coming up next month, politicians, eager to boost growth, have increased the pressure on Mr. Rajan to cut rates, hoping to revive output and cut unemployment.

Arvind Subramanian, the government's chief economic adviser, said recently the Indian economy appears to be "in or close to deflation territory," and played down inflation fears.

Retail and wholesale price-based inflation indexes dived to new lows in August on falling global commodity prices. Consumer inflation, which the RBI considers its benchmark, eased to 3.66% in August, from 3.69% the previous month.

The RBI has a medium-term consumer inflation target of 4%.

The wholesale price index fell for the 10th straight month in August.

Indicators from global markets suggest the downward trend will continue.

Mr. Rajan's decision to cut rates Tuesday also underscores India's relative strength during a difficult time for Asia.

Since turmoil in Asia two years ago, when the Fed upset markets by announcing that it would soon start tapering its loose-money policies, India has markedly improved its fundamentals.

Its foreign exchange reserves are near all-time highs and its current-account deficit has fallen to 1.5% of GDP this year, according to RBI estimates. Meanwhile its currency has remained relatively strong against the dollar.

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